Top Futures Algorithmic Trading Strategies | Definition And Examples

Best futures algorithmic trading strategies

While different traders have their own basis and focus when trading, what a trader sees as the best futures trading strategies might be different for another trader. Some futures algorithmic trading strategies use technical, fundamental, or both analyses to determine the best times to buy or sell contracts. Some of the best futures algorithmic trading strategies are listed below.

Trend following

Trend following chart example

Among the common futures algorithmic trading strategies that novice and professional traders employ is the “following trends strategy.” This strategy involves trading along recognized market trends after identifying them. Technical indicators are used to establish the direction of the trend and set stop-loss orders to minimize risk, giving traders utilizing the following trend clear entry and exit points. "Due to its adaptability as an algorithm that can analyze price movements and indicators to detect trends and execute trades, this strategy is primarily favored by futures algorithmic traders."

The fundamental concept underlying trend-following algorithms is to initiate long trades during uptrends (increasing prices) and short trades during downtrends (decreasing prices). These algorithms analyze past price data to detect trends, often utilizing technical indicators such as moving averages or the Directional Movement Index (DMI). Upon identifying a trend, the algorithm executes a trade aligned with the trend's direction, intending to maintain the position until indications of the trend's waning or reversal emerge.

Breakout trading

Breakout trading chart example

“Breakout trading” is another top futures algorithmic trading strategy for traders aiming to profit from new price movements in the futures market. The basic idea behind breakout trading is to enter trades when the price of an asset crosses past support or resistance levels; these events usually coincide with a spike in trading activity. While anticipating a breakout, algo traders seek out levels or regions where security has previously encountered difficulty surpassing. Price breakouts happen when it crosses over any of these marked levels.

Traders can choose to go long or short when an asset's price breaks through its resistance level and falls below its support level. Before planning their entry and exit points, traders must recognize the current price trend patterns by looking out for chart patterns like triangles, channels, heads and shoulders, rectangles, etc. They look for strong momentum, and the breakout serves as a signal to enter the position. Indicators like the relative strength index and Ichimoku Kinko are among the indicators that can be used to identify some of these patterns.

Range Trading

Range trading chart

Range trading is yet another futures algorithmic trading strategy for traders who prefer short trading. This strategy is centered on determining the range or difference between high and low prices. The terminus when using this future trading strategy is to purchase at the lower price point and sell at the higher price point.

This strategy is effective when the market lacks direction and the algo trader can identify the support and resistance levels defining the range. A basic guideline for traders entails identifying the trading range by observing at least two instances of price recovery from a support area and retreat from a resistance zone.

Traders can use oscillators for time range-based entries, and RSI, pivot points, CCI, and stochastics are among the top options. When prices fluctuate within a trading range, CCI and RSI can be used to confirm overbought and oversold conditions, while pivot points aid in identifying resistance and support on different levels. Once established, the simplest trading strategy is to buy near the support level and sell near the resistance.

Momentum trading

Momentum trading chart example

“Momentum trading” stands out as one of the top strategies in futures algorithmic trading, as it focuses on profiting from the ongoing trends in market prices. The fundamental idea driving this strategy is that assets that have recently experienced substantial price movements, whether upward or downward, are likely to continue moving in the same direction for a period of time. Algorithms for momentum trading are designed to spot these trends, enter trades in line with the momentum, and exit when the trend begins to weaken.

When incorporating this strategy, traders typically buy or sell an asset that is trending strongly in one direction and exit the trade when signs of a reversal appear. They aim to avoid trading assets that are moving sideways. The goal is to take advantage of short-term positions to benefit from market volatility within the context of a prevailing trend. To execute momentum-based algorithmic trading, traders analyze historical price data to identify assets that have experienced significant price changes over a specific period. Indicators like RSI, moving averages, and momentum help in identifying the best entry and exit times. The momentum indicator, for instance, determines trend strength by comparing the most recent closing price to the previous one.

News Trading

News trading chart

Since traders base their trading decisions on their predictions of how news and significant economic events will affect market sentiment, the news trading strategy appears to be different from the above futures trading strategies. When important economic news breaks, the algorithmic trader assesses its impact on asset prices and opens positions where this impact becomes noisy. This feature distinguishes news trading as primarily event-driven, differentiating it from traditional technical and fundamental trading methodologies.

The algorithm keeps track of significant news events and is programmed to profit from the ensuing volatility through potential trading gains. News traders only pay attention to signals that the market generates in response to triggering events. As a result, it is crucial to evaluate all underlying political, social, and economic factors influencing an asset's value. Trades can be carried out in advance, during, or following the news release, and their efficacy can be increased by incorporating technical analysis. When determining the best price levels to target before, during, and after a news event, tools such as oscillators and technical indicators such as moving averages and pivot points can help.

Pullback Strategy

Pullback trading chart

A pullback strategy is employed when the aim is for an algo trader to profit from a minor reversal in the market price that runs counter to the current trend. Here, the trader can buy assets when an upward trend is briefly decreasing or sell them when a downward trend is briefly increasing, hoping that prices will return to the initial trend. This futures trading strategy is used if a trader prefers to enter the market when prices are declining in expectation of an increase in the future.

To enter trades in the direction of the current trend, you must first identify the trends, set your pullback criteria, wait for a pullback, and confirm any potential reversals when they happen. The Relative Strength Index is a good example of a technical indicator that can be used to spot pullbacks (RSI), as it measures the strength of a stock's price action. The stock is oversold and may soon see a pullback when the RSI falls below a given threshold (e.g., 30). The premise behind this strategy is that futures prices undergo periodic retracements, which are brief price reversals that eventually resume their original course instead of moving linearly.

An example of futures algorithmic trading

Algo futures trading, which demands that a trader use computer programs to make trading decisions, requires you to create an algorithm that automatically buys when the price of an asset falls below a certain level on your strategy engine connected to your broker.

For example, you can develop an algorithmic trading strategy for trading E-mini S&P 500 futures contracts. The strategy can be integrated based on a combination of technical indicators like moving averages, relative strength index (RSI), and Bollinger bands. The algorithm would monitor the price movements of the E-mini S&P 500 futures and generate buy or sell signals based on predefined conditions. For instance, the algorithm would produce a sell signal if the price was above the upper Bollinger Band and the RSI crossed above 70. On the other hand, if the price was below the lower Bollinger Band and the RSI crossed below 30, the algorithm would produce a buy signal. The algorithm would immediately execute a trade upon generating a signal.

Futures trading example

Best brokers for futures automated trading

1

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Go to broker

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Review

The eToro broker was founded in 2007. The company promotes itself as a social trading platform working with traders from over 140 countries. The broker has several divisions operating under different jurisdictions and licensed by different regulators. For example, eToro (Europe) is licensed by the Cypriot regulator CySEC (109/10) and eToro (UK) is licensed by the British regulator FCA (583263). The broker also has a representative office in Australia and the USA. eToro Profile Details

Pros/Cons

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2

9.2/10

Go to broker

Your capital is at risk.

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No minimum

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Review

The name OANDA is an acronym for “Olsen & Associates” or “Olsen AND Associates”. It is registered in the United States and provides its clients with a wide range of financial services in most countries of the world. The company was founded in 1996 and is currently regulated in four jurisdictions. The main regulator of the broker is the UK Financial Conduct Authority (FCA). Oanda Canada is licensed by IIROC. The company has several significant awards to its credit, including a victory in the category "Best Forex Trading Technologies" from the UK Forex Awards, "Best Trading Platform" from FX Week, as well as "Best Customer Service" from the US Foreign Exchange Report.

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How do you succeed in futures algorithmic trading?

Succeeding in futures algorithmic trading involves a combination of technical expertise, disciplined strategy development, risk management, and adaptability. While you will need sufficient funds to trade with, you will also need a trading algorithm (this algorithm can be based on technical indicators, fundamental analysis, or other quantitative methods) or strategy that defines when to buy or sell. Additionally, you will need to know how to code your algorithm using Python, R, or other programming languages. Given that some algorithmic trading platforms offer visual interfaces for creating algorithms without the need for coding, this might not be a big deal.

Ensure that the broker you select allows automated trading and offers reliable execution, low latency, and support for your chosen markets. Understanding and complying with the regulatory requirements of the markets you're trading in, including rules related to algorithmic trading and automated trading systems, are paramount.

Pros and cons of futures algorithmic trading

Algorithmic trading in futures markets offers several advantages and disadvantages:

Is futures algorithmic trading legal?

Indeed, algorithmic trading is permissible under the law. There are no specific restrictions or statutes that prohibit the utilization of trading algorithms. While some market participants argue that algorithmic trading can lead to an inequitable trading landscape that negatively affects markets, there are established regulations and principles that traders and entities must abide by. In numerous jurisdictions, oversight of algorithmic trading in futures markets falls under the purview of financial regulatory authorities to maintain fair and well-ordered markets. Traders and entities involved in algorithmic trading are typically obligated to uphold specific standards and protocols, including risk management, algorithm validation, and adherence to market regulations.